Users of the Charity SORP should be aware that the SORP Committee has issued “SORP Update Bulletin 2”. But what is an “Update Bulletin”?
The SORP is based on FRS102, and so when there is a significant change to FRS 102, the SORP needs to be updated and this is not done by re-issuing the SORP but by issuing an “Update Bulletin”, incorporating the FRS102 changes and anything else deemed appropriate. Users need to refer to the Bulletin as well as the SORP to understand accounting practice in the areas affected. The Bulletin however shows which sections have changed and the revised wording.
So, back to the original question, what specifically has SORP Update Bulletin 2 ever done for us?
The answer is that there is some good news, including reducing disclosures and work required, but this needs to be balanced against other changes which are perhaps less helpful. Although this is not a full re-write of the SORP there are a number of amendments, some of which are reasonably significant, and affected charities need to be aware and make appropriate plans.
There are three sections to the Bulletin:-
- “Clarifying Amendments” (items the SORP Committee regards as consistent with the existing requirements of FRS102),
- “Significant Amendments” (items having a major impact or affecting a large number of charities) and
- “Other amendments”, minor changes to disclosures or affecting a limited number of charities.
The various changes will come in for periods commencing on or after 1 January 2019 but the preparing charity has the option to early-adopt. However, if a charity early adopts, it will have to adopt all of the changes, not just the ones it finds beneficial. (The original proposal was that the “Clarifying Amendments” should be applied with immediate affect so this has been relaxed).
What are the major changes?
The main “Clarifying amendments” are:-
- Firstly to ensure that comparative information is provided for virtually all the figures and notes in the financial statements, unless there is a specific exclusion (there are very few exclusions apart from movements in fixed assets).
- Secondly, donations of profit from a subsidiary to its parents are only recognised as income by the charity when the amount is actually paid or where there is a legal obligation, such as under a Deed of Covenant. This will mirror the treatment in the subsidiary company. Charities and their subsidiary companies will need to consider the impact and whether to change the process of declaring and paying donations. There will however be no change to the tax treatment purely as a result of these changes.
- Fixed Assets that comprise a number of components that have different useful lives need to be broken down into those components for the purposes of calculating depreciation. The “impractical or involving undue cost or effort” exemption from this requirement has been withdrawn.
What are the “Significant Amendments”?
The main “Significant Amendments” are:-
- Properties let to other group companies no longer necessarily need to be treated as investment properties, with annual revaluations. A choice of treatments will be available. A charity can instead choose to measure such properties at cost less depreciation (and impairment) as it was before FRS102 and as it will be in group accounts. There is also a choice of cost models available. Proper consideration needs to be given to the different methods as different options may make a significant difference.
- Mixed use property (i.e. where part of the property is used by the charity and part let out) should be separated between investment property and tangible fixed assets if the portions could be separately sold or leased (new stipulation). However, the “undue cost or effort” exemption has been withdrawn.
- Stock recognised as an expense no longer needs to be disclosed.
- A “reconciliation of net debt” needs to be included in the notes to the cash flow statement. An example layout is included in the Bulletin.
- Spinning-off activities e.g. into trading subsidiary companies can be accounted for as “mergers”, with different consolidation rules.
What are the “Other amendments”?
The main “Other amendments” largely concern certain detailed “Financial Instrument” disclosures, and the breakdown of intangible assets on acquisitions, all of which are fairly technical and likely to be of limited scope. The removal of the need to disclose separately “assets and liabilities measured at amortised cost” (mainly certain debtors and creditors) is however extremely welcome as most users of the accounts have not found this at all helpful or relevant. There is also an exclusion from consolidating immaterial subsidiary companies.
This is a very quick summary of the changes and if you require further information on how this will affect your charity please speak to your usual Menzies contact. There are a number of areas where choices may need to be made or steps taken to comply with the updated rules.